Does inflation targeting always matter for the ERPT? A robust approach

Abstract

This paper estimates the effects of different forms of inflation targeting (IT) in the exchange rate pass-through (ERPT). To this end, we first estimate the ERPT for a large sample of countries using state-space models. We then consider the adoption of an inflation targeting framework by a country as a treatment to find suitable counterfactuals to the actual targeters. By controlling for self-selection bias and endogeneity of the monetary policy regime, we confirm that the ERPT tends to be lower for countries adopting explicit IT. However, we uncover that older regimes, adopting a range or point with tolerance band and keeping inflation close to the target, outperform other IT regimes. We also show that IT is effective even with a relatively high inflation target or low central bank independence. JEL Classification: E31; E42; E52; C30.

Testing the asymmetric effects of exchange rate pass‐through in BRICS countries: Does the state of the economy matter?

“…These activities of the monetary authorities could lead to delay in stabilising responses to exchange rate variations to their equilibrium values. Therefore, our finding is consistent with Aleem and Lahiani (2014), Dube (2016), Kabundi and Mlachila (2018), Lopez‐Villavicencio and Pourroy (2019) and Mishkin and Schmidt‐Hebbel (2007), who posit recently within the framework of Taylor’s (2000) hypothesis that monetary policy stance matters for the pass‐through of exchange rate.…”

“…On the contrary, Aguirre and Padilla (2019) find that the sharp fall in ERPT over time in the Latin American region is underscored by the improvements in monetary policy performance. This is similar to Lopez‐Villavicencio and Pourroy (2019) who reveal that ERPT is low in countries with explicit inflation targeting policy. Furthermore, Soon, Baharumshah, and Wohar (2018) investigate whether inflation volatility matters in the asymmetric pass‐through of exchange rate in Asian countries.…”

“…Essentially, the issue has demonstrated a vastly increased risk to achieving the monetary policy goal of low and stable inflation levels especially during periods of greater openness, characterised by a significant change in exchange rate and trade policies (see Balcilar, Usman, & Agbede, 2019; Campa, Goldberg, & González‐Mínguez, 2004; Gagnon & Ihrig, 2004; McCarthy, 2000; Usman & Musa, 2018,). To cope with the inflationary pressure of exchange rate volatility and trade openness, most countries adopted inflation targeting as a monetary framework to gain credibility and keep low inflation expectations (Lopez‐Villavicencio & Pourroy, 2019; Mishkin & Schmidt‐Hebbel, 2007).…”

Assessing the Sustainability of Inflation Targeting: Evidence from EU Countries with Non-EURO Currencies

“…Second, most previous studies, as mentioned in the previous paragraphs, have often reported contradictory results and include, in the same sample, countries with different political regimes where monetary and fiscal policies have different features. According to reference [25], the differences in inflation, for example, between countries adopting IT (treated group) and the other countries (control group) could be due to systematic differences in some variables between IT and non-IT cases rather than due to the treatment. Third, to the best of our knowledge, there are no comparative attempts to identify, from an IT perspective, how non-EUR central banks protect the debtors exposed to currency risks.…”

What Drives Inflation in Gulf Cooperation Council (GCC) Countries

“…Theses hypotheses can be conducted as: GDP: some studies confirm a positive correlation between inflation and GDP (e.g. Ajmair, 2015;Lopez-Villavicencio & Pourroy, 2019). on the other side, few studies show that higher economic growth led to higher inflation rates (Bashir et al, 2011;Bhattacharya, 2014).…”